We're about to find out if Chipotle is overvalued

Chipotle’s stock has come a long way in the past month, climbing 14% near a one-year high. Now, ahead of Tuesday’s after-market earnings report, Wall Street analysts and options traders are split as to whether the gains can continue.

On one hand, heavyweight industry experts from Morgan Stanley to Goldman Sachs see the company’s shares as approaching full value, leaving little room to go higher.

While Morgan Stanley and Oppenheimer see the fast casual Mexican dining chain’s future earnings forecasts as “too optimistic,” Goldman has expressed pessimism around how customers will respond to higher prices.

On the other hand, despite the stock’s lofty level, investors are paying the least since December 2015 to protect against losses in Chipotle stock over the next six months, relative to S&P 500 hedges, according to Bloomberg data. That implies bullishness or, at the very least, a lack of concern that the stock could fall.

Just 20 months ago, when the stock was selling for well over $US700 per share, the idea that Chipotle shares would be peaking around $US480 per share would have seemed outlandish. Now, following a 14-state E. coli outbreak that spurred a year-long sales downturn and wiped out roughly half of the company’s market cap, this valuation range is the new normal for the Mexican fast-casual chain.

A main sticking point for Morgan Stanley and Oppenheimer is the level of future earnings being priced into Chipotle’s share price. They company will need to achieve EPS of at least $US20 over the next three years to justify current trading, the firms say, and the analysts just don’t see that happening.

And while investors may not be paying a high premium for hedging against a downturn in the stock, another measure of investor scepticism has climbed in recent months.

Short interest in Chipotle shares has risen by $US296 million in 2017, including a $US147 million increase in April alone, according to data compiled by S3 Partners. The current short interest total of $US2.2 billion represents about 16% of shares outstanding.

Still, Chipotle is expected to grow sales by 26% from the previous year, which would mark its best quarter since 2014, before the E. coli issues arose. And while the company lost $US26 million in net income a year ago, it’s expected to turn in a report of positive $US38 million this time around.

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